Tuesday, October 18, 2011

Never bring an injunction to a knife fight: eBay blocks injunctive relief

Leatherman sued for a preliminary injunction based on the Lanham Act and common law unfair competition to (1) forbid its competitor Coast from falsely stating that its knives are made from 440C steel; (2) forbid Coast from falsely stating that its knives are hardened to between 57 and 59 HRC; (3) enjoin Coast from falsely stating that each of its knives is individually hardness tested; and (4) order Coast to send corrective notices to retailers and customers. Unfortunately, Leatherman failed to show irreparable harm.

Coast advertised some of its products as being constructed of 440C steel and having a hardness of 57 to 59 on the Rockwell C scale, a measure of "hardness" that is abbreviated "HRC." One example from Coast's 2011 product catalog: "COAST knives & tools use only the finest quality 440C specially treated cutlery steel from Seki, Japan. An excellent steel for performance and durability, 440C is a high-chromium stainless steel with a terrific balance between hardness and corrosion resistance. COAST steel is produced in small quantities exclusively for the production of knife blades."

Leatherman had 61 different types of Coast knives independently tested for the type of steel and hardness of the blade. None of the tested knives were made of 440C steel, and only two had a hardness of 57 to 59 HRC. Coast’s expert didn’t dispute the testing procedures, and his analysis of test results from another lab confirmed Leatherman’s findings. Also, in November 2010, Coast learned that its factory in China was using 420 stainless steel instead of the purported 440C steel. “In June 2011, after this lawsuit had been filed, Coast issued a press release to employees and sales representatives admitting that most of its products are made with 420J2 steel.”

Coast took other corrective actions, which Leatherman found insufficient. Coast claimed to remove all references to 440C steel in its catalogs, product packaging, and marketing materials and to have printed new materials. Coast advertises that its products are "now made with 420 stainless cutlery steel," though “now” is not exactly true—they were made with 420 stainless before as well. In June 2011, Coast sent a message to its e-retailers: “Due to some recently discovered sourcing issues in connection with the production of some of our knives and multi-tools, we suggest you review your website descriptions of all COAST Knives and Multi-Tools and make the following change. Where you currently use the term 440C stainless steel to describe any of our knives or multi-tools, please change that description to read ‘400 series stainless steel.’” Only eight out of 41 e-retailers have made this change.

The court found that Coast’s corrective actions were indirect admissions of literally false statements in commercial advertising. Literally false statements are presumed likely to deceive. Coast argued that its online survey of 400 consumers who had purchased a sport/outdoor knife or a multi-purpose tool in the past two years and were somewhat likely to purchase another one in the next 12 months rebutted the presumption, but the court found this survey unhelpful because the survey participants were never presented with the false statements.

Materiality: There was insufficient evidence that the 440C steel and individual testing claims were made intentionally, and thus the court declined to presume materiality. Nor did the declaration of Leatherman’s VP help; he stated that type of steel is one of the most important factors in a purchasing decision, but did not explain the basis of this opinion. (Really? This seems self-evident to me: type of steel affects durability and sharpness, and maybe I as consumer don’t know the details but I can get that far.) There was some evidence of materiality, such as a consumer who reviewed the Coast knife this way: "I just bought this exact same knife from a department store. I was impressed that it was so cheap for a knife that has a blade made from 440C stainless steel." Further, Coast’s president hoped to achieve this result: in his deposition, he stated that he used these false statements “because he thought they would be important to the consumer and would distinguish Coast's products from competitors.”

Coast’s survey also went to materiality. “Respondents were asked the open-ended question of which features or consideration were most important when purchasing a knife or multi-tool. The majority of respondents gave answers that related to the material or quality of the product. The type of steel and the hardness of the blades are directly related to the material and quality of a product. The survey also shows that 17% of respondents said that a particular type of steel ‘greatly influences’ the purchasing decision.” Coast argued that the statements weren’t material because consumers couldn’t recognize what 440C or the hardness scale specifically meant. The court disagreed. “Simply because consumers were unable to recognize the 440C descriptor does not mean they would not be influenced by the perception of a superior product. Coast's false claim of 440C steel leads consumers to believe that they are purchasing a better product for a similar price.” So the survey reinforced “common sense” and Leatherman established materiality.

Leatherman argued that it was entitled to a presumption of irreparable harm on showing a tendency to deceive. Coast responded that eBay negated any such presumption or categorical rule for irreparable harm. The court concluded that presumptions of irreparable harm are no longer allowed. (Can we tell that to courts deciding trademark cases?) Leatherman’s VP declared that consumers "will be diverted to Coast's falsely advertised 440C knives" and that this diversion "erodes Leatherman's overall market share." The court found this insufficient. It was unclear whether the lost sales were to Leatherman or to others. Demonstrating diverted sales would be difficult, but not impossible; the record was inadequate on irreparable harm.

Leatherman argued that there was no equitable or public interest in allowing false advertising. Coast responded that it would suffer reputational harm if required to send a second corrective notice. The court noted that the first notice was ineffective, since most e-retailers ignored it, and the notice wasn’t sent to any of Coast’s 10,000 retail outlets. Moreover, the court found it “ironic that Coast is concerned about the effect that a second corrective notice might have on its reputation. It seems Coast was not concerned about its reputation when it blindly made assertions as to the quality of its products. Coast relied on the word of its Chinese trading company, despite having had product quality issues in the past.” Coast knew about the falsity in November 2010, but took no action until Leatherman sued, and the 2011 catalog contains the false statements. “Coast seems content to continue to reap the benefits of these false statements. The balance of the equities favors Leatherman, not Coast.”

Thus, while signalling that Leatherman has a good chance of winning, quite possibly even on summary judgment, the court denied a preliminary injunction for lack of irreparable harm. Both parties now have reason to settle, which might well be the court’s fervent wish.

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